Question 1

Susan quit her job as a teacher, which paid her $36,000 per year, in order to start her own catering business. She spent $12,000 of her savings, which had been earning 10 percent interest per year, on equipment for her business. She also borrowed $12,000 from her bank at 10 percent interest, which she also spent on equipment. For the past several months she has spent $1,000 per month on ingredients and other variable costs. Also for the past several months she has taken in $3,500 in monthly revenue. In the short run, Susan should

Accepted Answer

A)   shut down her business, and in the long run she should exit the industry.
B)   continue to operate her business, but in the long run she should exit the industry.
C)   continue to operate her business, but in the long run she will probably face competition from newly entering firms.
D)   continue to operate her business, and she is also in long-run equilibrium. B

Question 2

Which of the following firms is the closest to being a perfectly competitive firm?

Accepted Answer

A)   the New York Yankees
B)   Apple, Inc.
C)   DeBeers diamond wholesalers
D)   a wheat farmer in Kansas D

Question 3

Suppose that a firm in a competitive market is currently maximizing its short-run profit at an output of 50 units. If the current price is $9, the marginal cost of the 50th unit is $9, and the average total cost of producing 50 units is $4, what is the firm's profit?

Accepted Answer

A)   $0
B)   $200
C)   $250
D)   $450 C

Question 4

Figure 14-1
Suppose that a firm in a competitive market has the following cost curves: 
-Refer to Figure 14-1. If the market price rises above $6.30, the firm will earn

Accepted Answer

A)   positive economic profits in the short run.
B)   negative economic profits in the short run but remain in business.
C)   negative economic profits and shut down.
D)   zero economic profits in the short run.

Question 5

Suppose a firm in a competitive market produces and sells 150 units of output and earns $1,800 in total revenue from the sales. If the firm increases its output to 200 units, total revenue will be

Accepted Answer

A)   $2,000.
B)   $2,400.
C)   $4,200.
D)   We do not have enough information to answer the question.

Question 6

Scenario 14-4
The information below applies to a competitive firm that sells its output for $40 per unit.
-When the firm produces and sells 150 units of output, its average total cost is $24.50.
-When the firm produces and sells 151 units of output, its average total cost is $24.55.
-Refer to Scenario 14-4. When the firm produces 150 units of output, its total cost is

Accepted Answer

A)   $3,450.00.
B)   $3,525.75.
C)   $3,675.00.
D)   $3,850.25.

Question 7

When firms in a competitive market have different costs, it is likely that

Accepted Answer

A)   free entry and exit in the market will be violated.
B)   the market will no longer be considered competitive.
C)   long-run market supply will be downward sloping.
D)   some firms will earn positive economic profits in the long run.

Question 8

Scenario 14-4
The information below applies to a competitive firm that sells its output for $40 per unit.
-When the firm produces and sells 150 units of output, its average total cost is $24.50.
-When the firm produces and sells 151 units of output, its average total cost is $24.55.
-Refer to Scenario 14-4. Suppose the firm is currently producing and selling 150 units of output. Should the firm increase its output to 151 units?

Accepted Answer

A)   Yes, because the marginal revenue exceeds the marginal cost.
B)   Yes, because the marginal revenue exceeds the average total cost.
C)   No, because the marginal cost exceeds the marginal revenue.
D)   No, because the average total cost exceeds the marginal revenue.

Question 9

Profit-maximizing firms enter a competitive market when existing firms in that market have

Accepted Answer

A)   total revenues that exceed fixed costs.
B)   total revenues that exceed total variable costs.
C)   average total costs that exceed average revenue.
D)   average total costs less than market price.

Question 10

Consider a competitive market with a large number of identical firms. The firms in this market do not use any resources that are available only in limited quantities. In long-run equilibrium, market price is determined by

Accepted Answer

A)   the minimum point on the firms' average variable cost curve.
B)   the minimum point on the firms' average total cost curve.
C)   the portion of the marginal cost curve below average variable cost.
D)   a firm's level of sunk costs.

Question 11

Which of these types of costs can be ignored when an individual or a firm is making decisions?

Accepted Answer

A)   sunk costs
B)   marginal costs
C)   variable costs
D)   opportunity costs

Question 12

For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $7 and a marginal cost of $10. It follows that the

Accepted Answer

A)   production of the 100th unit of output increases the firm's profit by $3.
B)   production of the 100th unit of output increases the firm's average total cost by $7.
C)   firm's profit-maximizing level of output is less than 100 units.
D)   production of the101st unit of output must increase the firm's profit by more than $3.

Question 13

Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms are earning economic profits. Can this scenario be maintained in the long run? Explain your answer.

Accepted Answer

The answer of Use a graph to demonstrate the circumstances...

Question 14

Which of the following expressions is correct for a competitive firm?

Accepted Answer

A)   profit = (quantity of output)  x (price - average total cost) 
B)   marginal revenue = (change in total revenue) /(quantity of output) 
C)   average total cost = total variable cost/quantity of output
D)   average revenue = (marginal revenue)  x (quantity of output)

Question 15

When a competitive market experiences an increase in demand that increases production costs for existing firms and potential new entrants, which of the following is most likely to arise?

Accepted Answer

A)   The long-run market supply curve will be upward sloping.
B)   The condition of free entry into the market will be violated.
C)   Producer profits will fall in the long run.
D)   The long-run market supply curve will be horizontal as new firms enter and drive the price downward.

Question 16

In a competitive market the current price is $5. The typical firm in the market has ATC = $5.00 and AVC = $4.50.

Accepted Answer

A)   In the short run firms will shut down, and in the long run firms will leave the market.
B)   In the short run firms will continue to operate, but in the long run firms will leave the market.
C)   New firms will likely enter this market to capture any remaining economic profits.
D)   The firm will earn zero profits in both the short run and long run.

Question 17

Mrs. Smith operates a business in a competitive market. The current market price is $8.10. At her profit- maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should

Accepted Answer

A)   shut down her business in the short run but continue to operate in the long run.
B)   continue to operate in the short run but shut down in the long run.
C)   continue to operate in both the short run and long run.
D)   shut down in both the short run and long run.

Question 18

One of the defining characteristics of a perfectly competitive market is

Accepted Answer

A)   a small number of sellers.
B)   a large number of buyers and a small number of sellers.
C)   a similar product.
D)   significant advertising by firms to promote their products.

Question 19

Table 14-3
The table represents a demand curve faced by a firm in a competitive market.
 
-Refer to Table 14-3. For this firm, the marginal revenue is

Accepted Answer

A)   $26.
B)   $39.
C)   $13.
D)   $0.

Question 20

Whenever a perfectly competitive firm chooses to change its level of output, its marginal revenue

Accepted Answer

A)   increases if MR  ATC.
B)   does not change.
C)   increases.
D)   decreases.

Exam 14: Firms in Competitive Markets